How small pizza chains are competing through high cheese prices

While it may go largely unnoticed by American pizza consumers, the price of cheese — the costliest ingredient in pizza — has been rapidly rising throughout the past year. On the Chicago Mercantile, prices averaged $1.57 in March 2012, and they were $2.41 last week.

Larger, national chains may be more adept to withstand the upswing in pricing, while smaller concepts are having to weather a bigger storm.

Executives from both Domino's and Papa John's touched on the record-high cheese prices during their most recent earnings calls and said the trend could potentially help them take away more market share from smaller chains and independents.

"Whenever you look at commodity pressures, you've got that tendency to raise prices," Domino's CFO Michael Lawton said during his company's Q4 call. "It's easier to not raise prices and continue to do what's right for the customer to keep your prices at the price points that they're looking for as long as possible when you're running good volume through your stores. Each of the last four quarters at least, we've had good solid order count growth and I would hope that puts us in a stronger position to withstand short-term commodity bumps than somebody who is being stretched out on lesser volume."

Papa John's COO Tony Thompson added that there is "no question" larger chains are gaining market share, in large part because of pricing efficiency.

"From a pricing standpoint, you're still seeing some pretty competitive aggressive price points from both sides and that's a competitive environment we have to be sensitive to. We certainly pay attention to what our competitors are doing, but we manage out of our playbook," he said.

Smaller players leverage their strengths

Price fluctuations in commodities are part of the game in the industry that neither side can ignore. What's different is how both the larger chains and the smaller ones adapt to deal with swings in the prices. The smaller chains and concepts may not have the same capabilities when it comes to absorbing pricing hits, but most handle the perceived disadvantage by leveraging other attributes.

For example, according to Punxy Pizza Owner, Scott Anthony, the independents "Compete with their strengths. We may not have the buying power of the larger chains, but we do have quality and community connections/relationships. We have our roots deep into the community, not our 'branches'."

"For us, the quality of the product has always been a major advantage over the big chains. We absolutely will not cheapen our product quality — and we'll be the very last guy on the block to raise our prices to consumers," added Gregg Johnson, founder of 15-unit Minksy's Pizza. "It's a different attitude. Instead of worrying so much about food cost increases, we've decreased costs by negotiating fixed rent, and often our own real estate."

Drew French, founder of Your Pie, said there are already plenty of brands competing on price, and that high cheese prices will simply solidify why some customers come to his restaurant and why some choose the chains.

"The big boys are doing a pretty good job in the $10 pizza game. We believe we should never compete on price, but rather on a high quality product and great experience. We know we're never going to beat them on price to we try to make sure experience and quality are top notch. In the short term, we're able to absorb that (cheese) increase because we're not trying to compete in the price war," he said.

With the average cost of cheese nearly $1 higher than last year at this time, pizza concepts large and small will inevitably feel the impact and will combat the fluctuation in different ways. And, although big chains claim this trend falls in their favor, Anthony believes otherwise.

"The caution for those with a significantly lower food cost is not to 'brand' yourself as a cheap discount pizza," he said. "'You get what you pay for' will always be in the back of people's minds."

Holly Freeland /
Holly Freeland has been a freelance journalist since graduating from Western Kentucky University in 1998. She has written for numerous publications, including Catholicsportsnet.com, Louisville.com and other trade websites. She currently writes and leads research projects for Reed Business Information, a B-to-B publisher based in the United Kingdom.